Profit and Loss account

· Balance Sheet

· Cash flow statement

The figures shown in the annual statements will be in a summarized format. For example, the total value of all the assets such as land and buildings, plant and machinery, tools, vehicles, computers, etc. will reflect in the balance sheet as ‘fixed assets’. The details of fixed assets are provided in the schedule of fixed assets that is part of the balance sheet. Bigger the company, more the number of similar schedules that become part of the balance sheet.

Other than schedules, accounting rules permit accountants to arrive at certain figures taken on certain assumptions – for example, the accountant would have written off a certain percentage of debtors (the amount that is receivable from credit sales) as bad debts. This is done based on past experience where the company would have given goods on credit. The assumptions thus made will be disclosed separately in the statement as ‘notes to accounts’.

In addition to this, the chartered account may also give his opinion about assumptions made and about the truth and fairness of the disclosed figures in the financial statements. The auditor gives his opinion and comments on the audit report.

Apart from the three financial statements components, there are three other subcategories namely:-

· Schedules to accounts (Forming part of the balance sheet)

· Notes to accounts. ( Accountant’s notes on assumptions made)

· Audit report (Chartered Accountant’s comments and opinion)

Let us now look at these three segments and sub-segments which are part of a financial statement.

Income Statement

The income statement is a summary of sales (revenues or turnover) and expenses. The final figure can be either profit or loss depending on whether the total revenues exceed expenses, or whether expenses exceed revenues. The ‘profit’ or ‘loss’ in this statement is actually an ‘estimate’. To give an example, if the company shows a profit of say, Rs.100 crores in its statement, it does not imply that there is an excess of Rs 100 Crore in their bank account.

Balance Sheet

The balance sheet is again a summary of the assets of the company, its liabilities, and the share capital at a particular point in time. These three segments of the balance sheet give investors a gist of what the company owns as well as owes, as well as the shareholders’ investment.

Cash Flow Statement

It should be understood that ‘Profit’ and ‘cash’ are two different things. A statement that shows the ‘real cash’ coming in and how it has been utilized is what we call a cash flow statement. It shows the liquidity of the company. Just because the company is profitable does not mean be it has plenty of cash. Failure of a company can also happen because of a cash shortage although it is making a profit. So to analyze the economic realities, a cash flow statement is, therefore, prepared to analyze the real economic condition of the company.

Conclusion

Financial statements help to provide statistics of past performance. They do not provide important information such as risk factors and the quality of customers, management, and employees.

We cannot attribute the figures in financial statements to the future, as future earnings would depend on factors like market conditions both local and global, inflation, etc.

Despite these limitations, an investor depends on these figures because of the assumption that a company which has performed excellently in the past, will perform even better in the future.